Thursday, January 18, 2018

MARC has affirmed its rating of AAAIS on TNB Western Energy Berhad’s (TNB Western Energy) Sukuk of up to RM4.0 billion with a stable outlook. The rating and outlook are equalised with Tenaga Nasional Berhad’s (TNB) corporate credit rating of AAA/stable, taking into consideration the post-completion rolling guarantee provided by the parent to fund shortfalls in the finance service account (FSA) for the tenure of the sukuk. The rating is also underpinned by the close operational proximity between the entities and TNB’s undertaking to maintain full ownership of TNB Western Energy through TNB Manjung Five Sdn Bhd (TNB Manjung Five).

TNB Western Energy is the funding vehicle of parent TNB Manjung Five, a wholly-owned subsidiary of TNB. TNB Manjung Five was awarded a 25-year concession agreement by TNB on August 16, 2013 to design, construct, own, operate and manage a 1,000-megawatt coal-fired ultra-supercritical pressure steam power plant. The power plant, sited on a reclaimed island at Manjung, Perak, commenced operations on September 28, 2017, three days earlier than its scheduled commercial operation date. The total development cost of the power plant of RM5.05 billion was within the revised budget of RM5.11 billion.

A key risk during the operations phase is the failure to meet the minimum performance requirement under the power purchase agreement (PPA). In this regard, MARC opines that the warranties in the engineering, procurement and construction contract during the initial operating phase are adequate to mitigate any high impact losses. TNB Western Energy has contracted sister company TNB Repair & Maintenance Sdn Bhd (TNB Remaco) to operate and maintain the power plant under a 25-year operations and maintenance agreement (OMA). MARC views the O&M provider as experienced and competent. While the liabilities of TNB Remaco under the OMA are capped at a level which exposes TNB Western Energy to the risk of revenue losses, MARC believes the operations and maintenance provider will be sufficiently motivated to resolve issues promptly. In terms of fuel supply risk, this is adequately addressed through a long-term coal supply and transportation agreement with TNB Fuel Services Sdn Bhd. The risk is further mitigated by the close proximity between TNB Manjung Five and neighbouring power plants, which allows the plants to share coal yard and jetty facilities.

Under TNB Western Energy’s base case projections, the project is forecasted to have minimum and average pre-distribution finance service cover ratios (FSCR) with cash of 1.27 times and 1.33 times respectively during the sukuk tenure. MARC notes that the projected FSCRs are lower than other MARC-rated independent power producers, signalling lower resilience to operational issues. Based on MARC’s sensitivity analysis, the power plant can withstand minor breaches in its unplanned outage rate (UOR) or exceeding the PPA heat rate requirement of up to 7% and 1% respectively. The power plant is able to sustain a 10% increase in O&M cost and UOR of 1.8% before breaking even in 2023.

Most importantly, in the event of any shortfall in the FSA, MARC expects TNB’s rolling guarantee to be called upon to assist in the timely servicing of the sukuk. The rolling guarantee covers scheduled semi-annual distributions on the sukuk on a non-accelerable basis. The stable outlook on the rating reflects MARC’s stable view of TNB’s credit profile. Any changes in TNB Western Energy’s rating and/or outlook would be primarily driven by a revision of TNB’s rating and/or outlook.